Gamestop is a video game retailer. They sell video games and the hardware associated with it. They’re the largest retailer of pre-owned video game products in the world and carry a broad selection of all generations of video game consoles. They have a variety of loyalty programs in an attempt to connect with and keep customers.

Sentiment

With the growth of online gaming and video games increasingly delivered in digital form, sentiment against Gamestop is extremely negative. The perception is that due to Gamestop’s reliance on pre-owned video games and sales of new video games being delivered digitally, it is a diminishing market that is in a state of decline. Year to date the stock is down 35% and the current price of $16.31 is close to its 52-week low of $15.85.

My take

Despite the challenges, Gamestop has continued to deliver strong operating results. While top-line revenues have declined, the company has been able to improve gross profits. They have also been using their revenues from their dying (but highly profitable) business to return capital to shareholders in the form of a large dividend yield and stock buyback. The new video game console (the Nintendo Switch) should help deliver better results this holiday season.

With a P/E of 4.91, the sentiment is extremely negative against Gamestop. This is due to the fears that physical retail of gaming is a business that is destined for death. The low valuation is also due to a double whammy of hatred: they have physical retail stores and they have lots of locations in malls.

Gamestop is fighting the decline by adopting a subscription-based video game rental service for $60/month. Gamers can borrow as many games as they want from the physical store. They’re also using the cash flow from their declining (but highly profitable) used games business to return capital to shareholders. Gamestop is returning capital to shareholders in the form of dividends and buybacks. Common shares have declined by 2.59% in the last year and the dividend yield is currently 9.32%. Gamestop’s low debt/equity and low debt/EBITDA give it the balance sheet strength to pursue a turnaround strategy and continue the large return of capital to shareholders in the form of dividends and buybacks.